Chapter 7 Notes

Chapter 7
PPE and Intangibles
Types of Non-current Assets

Plant, Property
and Equipment
(PPE)
Construction in
Progress
Intangibles
Investment
Properties
Copyright 2014 Pearson Education.
PPE & Intangibles Terminology

Asset Account
(Balance Sheet)
Related Expense Account

(Income Statement)
Property, Plant and Equipment

Freehold Land
None
Leasehold land
Depreciation
Buildings, Machinery & Equipment
Depreciation
Furniture & Fixtures
Depreciation
Land Improvements
Depreciation
Natural Resources
Depletion
Intangibles
Intangibles with finite useful lives
2014 Pearson
Education.
Intangibles with Copyright
indefinite
useful
lives
Amortization
None
Learning Objective 1
Determine the cost of a PPE and account for
depreciation
Measuring the Cost of a PPE
Sum of all costs

incurred to ____
______________
______________
Asset
Costs included
Land
Purchase price, commissions, survey &

legal fees, and back property taxes paid;
grading and removing unwanted
buildings
Land Improvements
Fencing, paving, security systems &

lighting
Building
Constructed
Architectural fees, contractors charges,

materials, labor, and overhead; interest
on funds borrowed
Building
Purchased
Purchase price, brokers commission,

taxes paid and all costs to repair and
renovate building
Equipment
Purchase price, transportation, insurance

in transit, sale tax, installation and testing
Lump-Sum (Basket) Purchases

Several assets purchased in a group at one price
Total cost is allocated based on their market
values
For Example, a building valued at $2,700,000 and
land valued at $300,000 are purchased together
for $2,800,000.
Total
market
value
Asset
Market
value
Land
$300,000
$3,000,000
Building
$2,700,000
$3,000,000
Total
$3,000,000
% of
total
market
= value
Total cost
Cost of
each asset
10%
$2,800,000
$_______
90%
$2,800,000
$_______
100%
$_______
7
Subsequent Costs
CAPITAL
EXPENDITURES
EXPENSES
Increase capacity or
extend useful life
________
Cost is added to an
asset account
Do not extend
capacity or useful life
Maintain or restore
working order
Cost is recorded as an
expensejudgment
Distinction between the two requires
Depreciation
Systematic allocation of cost of an asset over its
life
Charged to Income Statement
DR Depreciation Expense
Cumulative amount charged is called

Accumulated Depreciation
CR Accumulated Depreciation
Supports _______________
Depreciation is NOT:
Valuation
process
A fund to
replace
assets
10
Amounts Needed for Depreciation
Cost
Useful
life
Residual
value
11
Depreciable amount
Asset cost
Residual value
12
Depreciation Methods
Straight-line
Units-of-production
Double-decliningbalance
13
Straight-Line (SL)
Depreciable cost
Useful life, ______
Results in equal
amount of expense
________
14
Accumulated
depreciation
increases
Book value
decreases
Assets final book value = Residual value
Estimated by manager
15
Units-of-Production (UOP)
Depreciable cost
Depreciation
per unit
Useful life ______
Depreciation
per unit
Activity for period
(units, miles)
16
Double-Declining-Balance (DDB)
Note: residual value is not subtracted here!
DDB rate
Book value
Straight-line rate
x 2 (or
2/life in years)
Cost minus
accumulated
depreciation
17
Residual Value: DDB

Ignored until final year
Final year
depreciation
Book value at the

beginning final year
Residual
value
18
DDB differences
First-year depreciation is based on assets full
cost
Final year depreciation is a plug amount
needed to reduce book value to residual value
19
Comparing Depreciation Methods

Depreciation Methods
$18,000
$16,000
$14,000
$12,000
S/L
UOP
DDB
$10,000
$8,000
$6,000
$4,000
$2,000
$-
20
21
Doubledecliningbalance
Best for assets
that _______
__________ in
useful life
Units-ofproduction
Best for assets
that _______
__________
Straight-line
Best for assets
that _______
__________
Best meets
matching
principle
Choosing Depreciation Methods
Depreciation Methods Used by 170 IFRS

Companies
Others; 5% Declining Balance; 2%

Units of Production; 9%
Straight Line; 84%
Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall.
22
E7-19A
West Sides Pizza bought a used Nissan delivery van
on January 2, 2010, for $19,000. The van was expected
to remain in service for four years (36,000 miles). At
the end of its useful life, West Sides officials estimated
that the vans residual value would be $2,800. The van
traveled 11,000 miles the first year, 13,000 miles the
second year, 5,000 miles the third year, and 7,000
miles in the fourth year.
What is the annual depreciation using the straight-line,
units-of-production, or double-declining method?
23
Exercise 7-19A
Straight-line
Depreciable cost
Useful life, in years
____________
__________
____________
depreciation
expense per year
24
Exercise 7-19A
Depreciable cost
Useful life in units
____________
____________
Units-of-production
Depreciation
per unit
_______
per mile
25
Exercise 7-19A
Units-of-production
Activity for period
Depreciation
per unit
$_____
per mile
(units, miles)
Depreciation
Miles
expense
11,000
$4,950
13,000
$5,850
5,000
$2,250
7,000
$3,150
26
Exercise 7-19A
Year
Double-declining-balance
DDB rate
2/Life in years
50%
2/4 years
Book value
Depr. Exp.
Accum.
Depr.
19,000
9,500
9,500
9,500
4,750
14,250
4,750
2,375
1,950
16,625
16,200
Book value
9,500 Less
4,750 than
residual
2,375 value
2,800
27
Learning Objective Two

Understand additional issues related to
accounting for PPE
28
Issues in Accounting for PPE

Income taxes
affected by
depreciation
Long lives
Alternative
subsequent
measurement
models
Gain and losses

on disposal of
PPE
29
Depreciation for Tax Purposes

Accelerated deprecation provides fastest tax deductions
Tax deductions decrease tax payments
Tax savings can be reinvested in business

The government might not give companies discretion over which rates to use
for depreciation. For example, Hong Kong and U.S.
30
Partial Year Depreciation

Annual
depreciation
Months from date of

purchase to end of year
12
We normally do not have to go further than 1 month.
31
Changing Useful Life

_________ depreciable book value
______Estimated remaining useful life
32
Impairment of PPE
An asset is impaired when its carrying value is
higher than its recoverable amount
Recoverable amount is the higher of fair value less
cost to sell and value in use.
DR _________________ & CR _________________
__________________________________________
33
Measurement Subsequent to Initial

Recognition
An entity elects one out of two measurement models for
each class of property
Cost model:
carried ______ less any accumulated depreciation and any
accumulated impairment losses.
Revaluation model:
carried at a ____________, less any subsequent accumulated
depreciation and subsequent accumulated impairment losses
fair value of asset must be able to be measured reliably
34
Using Fully Depreciated Assets

A fully depreciated asset is one that has reached the end
of its estimated useful life.
Book value is zero (or residual value)
Does not mean the equipment is worthless
Asset may be used for a few more years, but
depreciation __________________
When the company disposes of the equipment, it will
remove both the assets cost and its accumulated
depreciation from the books.
35
Learning Objective Three

Analyze the effects of a PPE disposal
36
Disposal of PPE
First Bring depreciation up-to-date to:
Measure assets final book value
Record expense up to date of disposal
Then Remove asset and related accumulated

depreciation account from books
If asset is junked (0 sale value):
Fully-depreciated and no residual value
No gain or loss
If not full-depreciated and/or has a residual value

Loss equals ending book value
37
Selling a Plant Asset

If cash received
is greater than
book value
GAIN
If cash received
is less than
book value
LOSS
38
Exercise 7-23A
Assume that on January 2, 2010, Maxwell of
Michigan purchased fixtures for $8,800 cash,
expecting the fixtures to remain in service five years.
Maxwell has depreciated the fixtures on a doubledeclining-balance basis, with $1,300 estimated
residual value. On August 31, 2011, Maxwell sold the
fixtures for $2,900 cash.
Record both the depreciation expense on the fixtures
for 2011 and then the sale of the fixtures.
39
Exercise 7-23A
2/5-year life =
40% DDB Rate
Year
2010
Beg. Book
value
Depr. Exp.
Accum.
Depr.
End Book
value
8,800
2011
$5,280 x 40% x 8/12
Cash received:
$2,900
Book value:
$_______
___ =
$___
40
Exercise 7-23A
JOURNAL
Date
Accounts and explanation
Debit
Credit
Aug 31
Aug 31
41
Exchanging PPE
Old assets traded in for new assets
Nonmonetary exchange
Cost of plant asset received is equal the fair

values of assets given up
Old asset and any cash paid
Difference between fair value of old asset and its

book value is a gain or loss
Example: exchange old van with $5,000 book
value ($8,000 cost and $3,000 accumulated
depreciation) for a new truck with fair value of
$10,000 and paying $3,000 cash.
What is the journal entry?
42
Learning Objective Four

Account for natural resources and depletion
43
Natural Resources
Include iron ore, oil and timber
Expensed through depletion
Similar to depreciation
Computed like _______________
Must estimate how much can be produced
JOURNAL
Date
Debit
Credit
Depletion expense
Accumulated depletion
44
Learning Objective Five

Account for intangible assets and amortization
45
Intangible Assets
No physical form
Carry special rights
Include patents, copyrights and franchises
Two categories
Finite lives
__________________
Straight-line method
Intangible asset reduced directly (not against
accumulated amortization)
Indefinite lives
__________________
Tested for loss in value (impairment)
46
Accounting for Specific Intangibles
Patents
Copyrights
Franchises
& licenses
Trademarks
and trade
names
Goodwill
47
Patents
Granted by government
Give holder exclusive right to produce and sell
an invention
HK 20 years or 8 years
US generally 20 years
48

Copyrights
Granted by the government
Give holder exclusive rights to reproduce and
sell a book, musical composition, film or other
work of art
HK Extend up to 50 years beyond authors life
US Extend up to 70 years beyond authors life
49
Trademarks and Trade Names

Distinctive identification of a product or service
Also include advertising slogans
Useful life may be set by contract

Or indefinite life
Indicated by TM or
HK (renewal 10 year periods)
US (20 years + renewal 10 year periods)
50
Franchises and Licenses

Granted by private business or government
Give purchase right to sell a product or service
with specified conditions
Include restaurant chains and sports
organizations
Have indefinite life (if renewable)
51
Goodwill
Defined as the excess of the purchase price of the
company over the market value of its net assets
Recorded only during the _______________
________
Represents earning power of company

purchased
__________, but subjected strict impairment
tests
52
Impairment of Intangible Asset

Decline in asset value
Write-down required if value of intangible
decreases below cost
Reversal of goodwill impairment is not allowed
Applies to all intangibles both those with finite

lives and indefinite lives
JOURNAL
Date
Debit
Credit
Impairment loss on intangible

Intangible asset
53
Research and Development Costs

Costs associated with creation of intangible
assets are classified into research phase and
development phase.
Research phase
Always expensed
Development phase
Capitalized if criteria are met (IFRS)
Generally, based on technical feasibility
(Expensed, not capitalized, under US GAAP)
54
Learning Objective Six

Report PPE transactions on the statement of
cash flows
55
Plant Asset Transactions on the

Cash Flow Statement
Item
Section
Description
Depreciation
Operating
Added to net income

as a reconciling item
Sales of PPE
Investing
Cash proceeds from

sales of PPE - inflow
Purchase of PPE
Investing
Cash purchases outflow
56

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Chapter 7

PPE and Intangibles

Types of Non-current Assets

Copyright 2014 Pearson Education.

PPE & Intangibles Terminology

Related Expense Account

Property, Plant and Equipment

Buildings, Machinery & Equipment

Furniture & Fixtures

Copyright 2014 Pearson Education.

Measuring the Cost of a PPE

Sum of all costs

Purchase price, commissions, survey &

Fencing, paving, security systems &

Architectural fees, contractors charges,

Purchase price, brokers commission,

Purchase price, transportation, insurance

Copyright 2014 Pearson Education.

Lump-Sum (Basket) Purchases

Copyright 2014 Pearson Education.

Cumulative amount charged is called

Copyright 2014 Pearson Education.

Amounts Needed for Depreciation

Copyright 2014 Pearson Education.

Copyright 2014 Pearson Education.

Useful life ______

Activity for period

Copyright 2014 Pearson Education.

Copyright 2014 Pearson Education.

Residual Value: DDB

Book value at the

Copyright 2014 Pearson Education.

Copyright 2014 Pearson Education.

Comparing Depreciation Methods

Copyright 2014 Pearson Education.

Copyright 2014 Pearson Education.

Choosing Depreciation Methods

Depreciation Methods Used by 170 IFRS

Others; 5% Declining Balance; 2%

Straight Line; 84%

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall.

Copyright 2014 Pearson Education.

Activity for period

Copyright 2014 Pearson Education.

Learning Objective Two

Copyright 2014 Pearson Education.

Issues in Accounting for PPE

Gain and losses

Copyright 2014 Pearson Education.

Depreciation for Tax Purposes

Tax deductions decrease tax payments

Tax savings can be reinvested in business

Partial Year Depreciation

Months from date of

Copyright 2014 Pearson Education.

Changing Useful Life

Copyright 2014 Pearson Education.

Copyright 2014 Pearson Education.

Measurement Subsequent to Initial

Copyright 2014 Pearson Education.

Using Fully Depreciated Assets

Copyright 2014 Pearson Education.

Learning Objective Three

Copyright 2014 Pearson Education.